Insights – Hong Kong Compulsory Sale Regime Revamped: New and Improved?
The amendments to Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (the “Ordinance”) passed in 2024[1] will come into operation on 6 December 2024.
According to the Development Bureau, 75% of new flats from redevelopment projects in the last 10 years came from private redevelopment projects, with the remainder coming from the Urban Renewal Authority.[2] The amendments represent a significant update to Hong Kong’s urban redevelopment framework, aimed at addressing the challenges posed by aging and dilapidated buildings.
Emily Ting discusses the major legislative amendments and their impact on future compulsory sale proceedings.
Lowered thresholds required for applications for compulsory sale
The existing Ordinance enables private developers owning at least 80% of undivided shares in a lot to apply to the Lands Tribunal for compulsory sale of the whole lot for redevelopment: s.3(1) and the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (Cap. 545A). This threshold applies regardless of the location of the lot in question.
The amended Ordinance provides for lowered ownership percentage thresholds to commence a compulsory sale application (via amendments to s.3 and Cap. 545A). The thresholds are various and the applicable threshold depends on the type of existing building (private or industrial), the age of the building concerned, and the district the lot/building is located in. The lowest threshold under the new regime is 65%, a significant drop from 80%.
The amended Ordinance provides for certain “designated areas” in which the thresholds for private buildings would be lower than non-designated areas. The first batch of “Designated Areas” are: [3] Cheung Sha Wan; Ma Tau Kok (including Kowloon City and To Kwa Wan); Mong Kok; Yau Ma Tei; Tsuen Wan; Sai Ying Pun and Sheung Wan; and Wan Chai. This is intended to be policy differentiation between districts with more pressing redevelopment need and districts with less, no doubt with a view towards encouraging urban renewal of those areas.
The changes for private buildings can be summarised as follows:-
For industrial buildings aged 30 or above in non-industrial zones, the threshold is reduced from 80% to 70%.
Increased flexibility in multiple adjoining-lot applications
Under the existing Ordinance, the ownership threshold is met on an individual lot basis (under s.3(1) or s.3(2)(a)), where an applicant must meet the requisite threshold for each lot in order to be able to bring the application, with the only exception being s.3(2)(b) where “one building is connected to another building by a staircase intended for common use”, in respect of which, the threshold can be achieved by taking average across the relevant lots, which was described as the “special route” under s.3(2)(b) by the Court of Appeal in Pacific Base Holdings Ltd & Ors v Lee Hop Biu & Ors [2021] HKCA 780 [2021] 5 HKC 214 at §17(f).
The existing regime has thrown up much argument over the years:-
– There is ambiguity in the existing Ordinance as to whether lots wholly-owned (i.e. 100% of the undivided shares of the lot) by the applicant may be included in a compulsory sale application, a question which the Court of Appeal answered in the negative in Bond Star Development Limited v Capital Well Limited [2004] 2 HKLRD 855.
– The “averaging” exception under s.3(2)(b) has been the subject of some contention when developers have sought to meet the requisite threshold by averaging between a 100%-owned lot and another lot where the developer owns less than the normal threshold of 80% (usually around 60 or 70%)[4], where the two lots were connected by a common staircase.
The amended Ordinance not only relaxes the existing common-staircase “averaging” requirement but also provides a number of means to allow multiple adjoining-lot applications.
– First, the amended Ordinance allows the inclusion of wholly-owned lots in a multiple adjoining-lot application (even with no common staircases connecting the buildings erected thereon) (under the new s.3(2B)).
– Second, the amended Ordinance allows the “averaging” arrangement for two or more lots adjoining to each other, even with no common staircases connecting the buildings erected thereon (under the new s.3(2)(c) and (d)). An application may include three or more lots, composed of more than one set of staircase-connected lots, or a combination of two or more of (i) majority-owned lots, (ii) staircase-connected lots and (iii) adjoining lots, which are adjoined to form a cluster of lots bound by a “continuous boundary” (under the new s.3(2)(d) and s.3(2A)). The “averaging” calculation will not only be done by reference to ownership thresholds, but also by reference to the areas of the individual adjoining lots by introducing the concept of “weighted average” (under the new s.3(8)).
– Note however that the existing common-staircase averaging arrangement will continue to apply (under the amended s.3(2)(b)).
– Third, the amended Ordinance requires that once the adjoining lots covered by the same compulsory sale application are sold pursuant to an order for sale granted by the Lands Tribunal, the lots must be redeveloped as a whole, or as part of a larger redevelopment site combining other lots (under the new s.4C). This is clearly to prevent the situation of being restricted to redeveloping “pencil” blocks. The Building Authority is empowered to ensure these requirements are complied with. It is uncertain, however, whether such a requirement would hinder redevelopment of a large site in phases.
Reserve price for multiple adjoining-lot applications to take into account joint redevelopment potential
A significant amendment related to the adjoining lot issue above is the treatment of reserve price in multiple adjoining-lot applications.
Under the existing Ordinance, if the Tribunal decides to make an order for sale, the reserve price is set by the Tribunal taking into account the redevelopment potential of the lots “on its own”, or where two or more lots are the subject of the auction, “on their own” (paragraph 2(a) of Schedule 2). This ambiguity in the wording of the Ordinance has resulted in much argument over the years on whether the joint redevelopment potential of the merged site in a multiple adjoining-lot application should be taken into account. The current position according to case law[5] is that the joint potential is not taken into account due to the strict statutory language of paragraph 2, Schedule 2, resulting in minority owners not being able to share, in their compensation after an order for sale, in the redevelopment potential of a merged site even if the majority owner intends to develop the multiple lots as one merged site in future and may reap significant benefits from such redevelopment potential of a larger site.
The amended Ordinance provides expressly that where an order for sale covers two or more lots, the reserve price shall take into account “the joint redevelopment potential of the lots on their own” (under amended paragraph 2(a) of Schedule 2), in other words, the merged site of all the lots covered in that order for sale. In such a case, the method of apportioning the sale proceeds to the owners would be: (i) firstly to individual lots on pro-rata basis based on redevelopment value of each lot; and (ii) secondly to individual units in each lot on a pro-rata basis based on the existing use value of each unit in that lot (under paragraph 2 of the amended Part 3 of Schedule 1).
While the new weighted average arrangement may incentivise majority owners and developers to amalgamate adjoining lots under a single compulsory sale application, it appears that majority owners remain at liberty to deliberately split up adjoining or connected lots into several applications to reduce the assessed redevelopment potential (and thus compensation to minority owners), while subsequently developing all the lots jointly. There appears to be little in the amended regime to deter or prevent such situation if the majority owners choose to do so. Indeed, it may be the case that the new provisions for (i) reserve price for a multi-lot application to be based on the joint redevelopment potential of all the lots under an order for sale, and (ii) the requirement to redevelop subject multiple lots as a merged site, may actually disincentivise majority owners from bringing an application covering multiple adjoining lots.
The wording of the existing Ordinance has also thrown up ambiguity as to whether the Tribunal has discretion to consider other matters on top of redevelopment potential of the subject lot in determining the reserve price: China Orchid International Ltd & Ors v Fujitec (HK) Co Ltd & Ors [2023] HKLdT 38 at §§314-315. On the face of the amended wording, such ambiguity is not immediately resolved, although the legislative materials have clarified that in the Tribunal should only take into account the redevelopment potential stated in the new paragraph 2, Schedule 2, and “is not required to take into consideration other factors under Cap. 545”.[6]
Dispensing with the requirement to justify redevelopment on the ground of age or state of repair in certain cases
Under the existing regime, before deciding whether to make an order for sale of the lots in question, the Lands Tribunal has to be satisfied, among other things, that the redevelopment of the lot is justified due to the “age or state of repair” of the existing development on the lot (s.4(2)(a)(i)). Applicants must adduce expert reports to satisfy this regardless of whether minority owners object on this ground.
The amended Ordinance dispenses with the requirement to justify redevelopment on the ground of “age or state of repair”, for cases where all of the following requirements are met: (i) all buildings on the lot are more than 50 years old; and (ii) all minority owners affected by the compulsory sale application have been identified; and (iii) each minority owner concerned has given notice indicating he has no objection to the Tribunal not considering if redevelopment of the lot is justified due to the “age” or “state of repair” of the existing development (under the new s.4(2A)).
The existing Ordinance does not define “age or state of repair” and the amended Ordinance does not change this. It is worth noting that an earlier proposal[7] by the Administration to codify the tests which should be applied for considering the “age or state of repair” has been abandoned, meaning that the tests and factors applicable for considering this ground continue to be a matter of case law.
Enhancing support for minority owners who are owner-occupiers
The existing Ordinance does not deal with the departure arrangements of minority owners where an order for sale is made by the Lands Tribunal and the lot is sold. The amended Ordinance allows for minority owners who are also occupiers to stay in their properties for up to six months after the sale (under the new s.4B).
Looking ahead
The overarching goal of these amendments is to accelerate urban renewal in Hong Kong by encouraging private sector involvement in redeveloping aging infrastructure. The Development Bureau has emphasised that these changes will not only help mitigate safety risks associated with old buildings but also improve living conditions for residents, and it is clear that the the amendments greatly facilitate the acquisition of minority interests by majority owners. On the other hand, concerns remain as to whether the all-important balance between facilitating development and protecting the rights of minority property owners – a key objective of the Ordinance[8] – has been struck. In particular, given the new provisions on reserve price based on joint redevelopment potential and mandatory merged-site development in multiple adjoining-lot applications, it remains to be seen whether the amended Ordinance could incentivise more merged-site applications and facilitate large swathes of urban redevelopment, and allow minority owners to share in the proceeds from such multi-lot applications. As these amendments come into effect, their impact on both majority owners/developers and minority owners, as well as the contentions over the amended wording of the Ordinance, will be closely monitored.
[1] The Land (Compulsory Sale for Redevelopment) (Amendment) Ordinance 2024 (Ord. No. 25 of 2024)
[2] Legislative Council Brief for Land (Compulsory Sale for Redevelopment) (Amendment) Bill 2023 (DEVB (PL-UR)70/41/85/15), paragraph 3.
[3] The Designated Areas are selected based on the areas under the Outline Zoning Plans with 300 or more buildings aged 50 or more and 200 or more buildings issued with Mandatory Building Inspection Scheme notices: Legislative Council Brief for Land (Compulsory Sale for Redevelopment) (Amendment) Bill 2023 (DEVB (PL-UR)70/41/85/15), footnote 7.
[4] See for example: Max Win Development (HK) Ltd v Gain Excel Ltd & Anr [2022] HKLdT 51 (pair of lots, 100%-owned and 66.67% owned), Winmark Properties Ltd & Anr v Prime Way Investment Co Ltd & Ors [2022] HKLdT 62 (pair of lots, 100%-owned and 75%-owned at the time of trial); Ever Great Development Ltd v Chan Woon Cham & Ors [2023] HKLdT 50 (pair of lots 100%-owned and 66.67%-owned at the time of trial).
[5] See for example, Century Treasure v Or Pui Kwan [2024] 1 HKLRD 72 (CA); China Orchid International Ltd & Ors v Fujitec (HK) Co Ltd & Ors [2023] HKLdT 38; Asia Bright Enterprises Ltd & Ors v Liu Cheuk Man & Ors [2023] HKLdT 30; First Mate Development v Gee Wing Chung [2018] 1 HKLRD 668; Day Bright Development Ltd v Choi Pak Ling [2014] 4 HKC 364.
[6] The Administration’s reply dated 5 April 2024 to the Legal Service Division’s letter dated 1 February 2024 (LC Paper No. CB(1)386/2024(03)), Annex paragraph 7.
[7] Proposed Measures to Update and Streamline the Compulsory Sale Regime dated November 2022, LC Paper No. CB(1)776/2022(05), paragraphs 23-25.
[8] See Capital Well v Bond Star (2005) 8 HKCFAR 578 at §21 per Ribeiro PJ and Sin Ho Yuen v Fineway Properties Ltd (2011) 14 HKCFAR 497 at §25 per Litton PJ.
Emily Ting
Called to the Bar in 2019, Emily has a broad civil practice with an emphasis on chancery matters. She is active in the area of land law (including land compulsory sale applications, adverse possession, mortgage actions, building planning, and advising on easements and governments leases) and has co-authored the articles Summary possession of land under Order 113: Practical tips (with Mr. Ross Yuen) and Exemption clauses in the Deed of Mutual Covenant: A built-in shield against liability for building managers? (with Ms. Isabel Tam).
Emily’s recent compulsory sale cases include:
• Ever Great Development Limited v Fong Yau Shun & Ors[2023] HKLdT 50 where the Lands Tribunal considered the issue of whether a 100%-owned lot can be included in the application and used to calculate the average ownership to meet the statutory percentage (case commentary here).
• Peace Ever Limited & Ors v Au Kai & Ors [2023] HKLdT 41 (with Mr. Ross Yuen) involving objection to order for sale on the ground of undue hardship; inclusion of private lane in calculation of site coverage and plot ratio; and record-breaking reserve price of HK$6.31 billion set by the Lands Tribunal.
• China Orchid International Limited & others v Fujitec (HK) Company Limited & others [2023] HKLdT 38 (with Mr. Ross Yuen) where the Tribunal gave value to unauthorized building works and set record-breaking reserve price of HK$5.125 billion (case commentary here).
Emily was recently recognised by Legal 500 Asia-Pacific 2025 as a Rising Star – Competition.
More details can be found in Emily’s profile.
This article was first published on 2 December 2024.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photographs which appear in this article are included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related. The views and opinions expressed in this article/material are solely those of the members authoring it and do not necessarily reflect the official policy or position of Denis Chang’s Chambers, or of any other member or members of Denis Chang’s Chambers.